US Attorney: Pension Fund Exec Moved $2B for Drugs, Prostitutes, Other Bribes

U.S. Attorney Preet Bharara discusses the arrest of New York City Correction Officers' Benevolent Association President Norman Seabrook on June 8, 2016. (credit: CBS2)

NEW YORK (CBSNewYork/AP) — A former top official at the country’s third-largest pension fund and two broker-dealers were charged Wednesday in what a federal prosecutor described as a classic bribery scheme that steered $2 billion in trades in exchange for drugs, prostitutes, vacations and U.S. Open tennis tickets.

“The hard-earned pension savings of New Yorkers should never serve as a vehicle for corrupt, personal enrichment,” Manhattan U.S. Attorney Preet Bharara said in a statement, calling the alleged pay-for-play arrangement a “classic, quid-pro-quo bribery scheme.”

Navnoor Kang, the ex-head of the $184 billion New York State Common Retirement Fund’s fixed income trades, received more than $100,000 worth of bribes in the form of trips, gifts, luxury hotel stays and other payoffs from broker-dealers Deborah Kelley and Gregg Schonhorn, prosecutors said.

Kang, 38, was arrested in Portland, Oregon, on securities fraud, honest service wire fraud, conspiracy and obstruction of justice charges.

His attorney, Lauren DeSantis-Then, said her client denies all the charges.

“Mr. Kang is not guilty and we look forward to our day in court,” she said.

Kelley, 58, of Piedmont, California, was expected to surrender, authorities said. Her attorney didn’t immediately return a request for comment.

Schonhorn, 45, of Short Hills, New Jersey, has pleaded guilty and is cooperating with federal authorities, court papers show. His lawyer didn’t immediately return a request for comment.

Regulators found that Kang steered about $2 billion in fixed-income trades to firms represented by Kelley and Schonhorn beginning in early 2014, resulting in millions of dollars in commissions, of which the two earned between 35 and 40 percent, according to an indictment.

In that time, securities investigators found that the firms’ fixed-income business surged, with one of them increasing its domestic bond transactions from zero at the end of fiscal year 2013 to $2.378 billion at the end of fiscal year 2016, making it one of the top broker dealers doing state pension fund business, according to the complaint.

Prosecutors said that in exchange, Kang received a $10,000 all-expenses-paid trip to Montreal, Canada; a ski trip to Park City, Utah; tickets to a Paul McCartney concert in New Orleans; a $17,420 Panerai wristwatch; dinners at upscale restaurants; nights out at strip clubs; prostitutes; and cocaine.

The state’s pension fund has been the source of scandal before.

In 2010, a state comptroller pleaded guilty to charges he steered pension funds to a campaign contributor. Further investigations revealed investors’ widespread use of so-called placement agents to access pension funds, an arrangement some regulators have likened to pay-to-play.

Kang had been fired in 2012 by a private investment firm for accepting gifts from Schonhorn in exchange for steering fixed-income business, but he lied about his termination when he was hired by the state fund, according to the complaint.

Asked whether state officials properly investigated Kang before hiring him, a spokesman for the comptroller’s office said only that “background checks are a routine part of the hiring process.”